Know the constant analysis method. A brief analysis of some legal issues of the agreement of concerted action.
Author | Zhiheng (Shanghai) Lou Mengqian Lawyer
1.
Concept and effect of concerted action agreement
(I) concept of concerted action
With regard to the definition of concerted action, the current 《The Company Law of the People's Republic of the People's Republic of China (hereinafter referred to as the "Company Law"), the the People's Republic of China LawThe Securities Law and other existing laws, regulations and departmental rules are not clearly defined, the main provisions of which are found inChinaSecurities Regulatory Commission (hereinafter referred to"SFC") promulgatedParagraph 1 of Article 83 of the Measures for the Administration of Acquisitions of Listed Companies:“The term "concerted action" as mentioned in these Measures refers to the act or fact that investors, through agreements or other arrangements, jointly expand the number of voting rights of shares of a listed company at their disposal with other investors.”。
Accordingly, a broad concerted action agreement can be defined——A written agreement signed by an investor and other investors for the act or fact of jointly expanding the number of voting rights held by the underlying company at their disposal.
Effectiveness of agreements (II) concerted action
Agreement on concerted action in the contractThe validity of this aspect shall be judged in accordance with the relevant provisions of Chapter III of the first subpart of the contract of the Civil Code and Chapter VI of the General Provisions of the Civil Code on civil legal acts. Generally speaking, as long as the concerted action agreement is the true intention of both parties or parties, and the content does not violate the mandatory provisions of China's laws and administrative regulations, it should be valid.
On the effectiveness of corporate governance in the context of concerted action agreements, the Company Law, the Measures for the Administration of Acquisitions of Listed Companies and other laws.The statute does not provide for validity. According to the provisions of the Company Law,Shareholders can exercise their voting rights of their own will, and the signing of the agreement of concerted action will not harm the interests of the company and other shareholders, so the agreement of concerted action is legal and valid.
The "Shenzhen Stock Exchange Stock Listing Rules" stipulates that the controlling shareholder and actual controller of a listed company shall exercise shareholder rights and perform shareholder obligations in accordance with laws and regulations, and shall not conceal the identity of its controlling shareholder or actual controller, and evade relevant obligations and responsibilities. Where a company is controlled through the execution of a concerted action agreement, the agreement shall clearly set forth the relevant control arrangements and the mechanisms for their termination.
The Shanghai Stock Exchange Stock Listing Rules stipulate that if a company is controlled by signing a concerted action agreement, the relevant control arrangements and cancellation mechanism shall be specified in the agreement. The China Securities Regulatory Commission<Measures for the Administration of Registration of Initial Public Offerings> Articles 12, 13, 31, 44 and 45 and Guidelines for the Content and Format of Information Disclosure by Companies Offering Securities to the PublicNo. 57——Opinions on the application of the relevant provisions of Article 7 of the prospectus.——Opinion No. 17 on the Application of Securities and Futures LawWhere a joint controller signs a concerted action agreement, it shall specify in the agreement the mechanism for resolving differences of opinion or disputes.
from listed companiesAt the level of regulatory practice, the law does not prohibit or restrictListed companyA concerted action agreement signed by shareholders or directors in accordance with the law and reflecting the true intentions of the parties to the agreement. Shenzhen Intermediate People's Court of Guangdong Province (2017) Guangdong 03 2465 at the beginning of the Republic of ChinaDecision No. 1 states that it is necessary to examine whether the content of the agreement is valid in judging its validity.“Violation of the provisions relating to the disclosure obligations of listed companies and their shareholders or for the purpose of circumventing the obligation to disclose information.”。
2.
Dispute Resolution for Concerted Action Agreements
Mechanisms for the formation of (I) consensus
1. The opinion of one of the parties shall prevail.
In practice,"Subject to the opinion of one party" is divided into "all matters, subject to the opinion of one party" and "distinguishing matters, subject to the opinion of one party". "All matters shall be subject to the opinions of one party", that is, when there is a difference of opinion among concerted action, it is clear that the decision of one party shall be the unanimous opinion.
With its significant advantages of high decision-making efficiency and strong execution certainty, this mechanism has become the most accepted solution in the practice of capital market supervision, and it is also relatively easy to obtain the approval of the regulatory authorities, especially when one party to the agreement is identified as the actual controller. In the case, the mechanism based on the opinions of the actual controller can more directly and effectively dispel the doubts of the regulatory agency.
When there is a clear division of management functions among concerted actors, the mechanism may lead to an imbalance in the corporate governance structure-over-centralized decision-making power may weaken the value of the professional judgment of other concerted actors in their areas of responsibility, thus raising the risk of strategic errors due to a single decision-making perspective.
"Distinguishing matters, subject to the opinions of one party" refers to distinguishing the company's operation and management matters, and the opinions of different concerted actors shall prevail for different matters. Such mechanisms are in line with the actual situation of the company's management division of labor and can promote accurate decision-making by different controllers in their respective areas of responsibility, but it is necessary to classify company matters in a clear and enforceable manner to avoid unreasonable allocation of decision-making power, and there may indeed be individual matters that cannot be accurately classified in practice.
The effective implementation of the mechanism needs to meet two core elements: first, the criteria for the classification of decision-making matters should be both comprehensive and operational. In practical implementation, it is recommended to supplement the process with a mechanism for periodic agreement revisions and a system of expert consultations to address the challenges of category adaptation arising from the dynamic changes in the business environment.
(2) The minority is subordinate to the majority
concerted action agreementThe principle of minority obedience to majority in dispute settlement mechanisms includes capital majority and number majority.：
(1) Capital majority decision
"Capital Majority"That is, if the parties to the agreement fail to reach an agreement, the parties to the agreement shall vote in accordance with the amount of shares (or voting rights) held by each party, and the opinion of the party or parties holding the largest number of shares (or voting rights) of the company shall prevail. Such mechanisms facilitate efficient decision-making and help maintain the stability of corporate governance; however, they may also lead to the neglect of legitimate interests of minority shareholders and potentially undermine the transparency and fairness of corporate governance.。
Some companies will also set a specific proportion, to reach a certain shareholding ratio or number of people ratio, according to the majority opinion of the implementation.
(2) Majority
"Majority"That is, it is agreed that if the parties to the agreement fail to reach an agreement, the parties shall form an agreement in accordance with the principle that one person, one vote, the minority is subordinate to the majority. Such mechanisms can better reflect the will and views of the parties involved.，It can effectively avoid the monopoly of decision-making power by major shareholders and ensure that the company's decision-making opinions are more comprehensive and objective.。
However, ignoring the actual capital contribution and interests of shareholders in the company leads to the dominance of small shareholders (the party with a lower proportion of shares but a larger number of people) in decision-making., easily causedThere is a conflict between the capital investment of major shareholders and the protection of rights and interests.
3、Neither should propose a motion or vote against it.
It is agreed that if the parties to the agreement fail to reach an agreement, in order to ensure the stable operation of the company, no proposal shall be put forward for relevant matters; all proposals put forward by non-parties to the agreement shall be voted against. This dispute resolution mechanism essentially serves as a supplement to the majority-rule system, aligning with the company’s prudent operational strategy and helping to mitigate risk losses arising from decision-making errors. However, it may also lead to reduced decision-making efficiency, and there are instances where certain matters are affected by…People acting in concertThe risk of disagreement and failure to advance.
The relief of breach of contract in the dispute of (II) concerted action agreement.
In the event of a breach of contract, there is still some controversy in practice as to whether it is possible to require the mandatory performance of the agreement of concerted action, or directly in accordance with the agreement of concerted action, one of the parties on behalf of the other parties to exercise the right to vote in the general meeting of shareholders or the board of directors. How can rights holders seek legal remedies?Can the subject company directly revise the voting opinion of the defaulting party and count the votes (I. e., mandatory return of votes)How to bear the liability for breach of contract has become a controversial problem in corporate governance and judicial adjudication.。
When the Jiangxi Provincial Higher People's Court tried the (2017) Ganmin Shen No. 367 case, it was against compulsory return of votes.That is, it holds an affirmative opinion that the subject company may directly amend the voting opinion of the defaulting party to the opinion of the right holder for the return and counting of votes.However, in judicial practice, there are more cases of negative opinions on compulsory return of votes.
People's Court of Xihu District, Hangzhou City, Zhejiang Province (2018) Zhejiang 0106 Minchu No. 3961 caseThe court held that concerted action should be based on the consensus of all the signatories to the agreement, and that if no agreement can be reached through consultation, the signatories should be allowed to express their personal will, not force.
"Agreements" should be allowed"The parties have the right to withdraw, and if the withdrawing party causes losses to the other party as a result of its withdrawal, it may compensate the other party for the losses as agreed in the agreement. The claim for continued performance of the concerted action agreement is, in law or in fact, impossible to fulfill and is not subject to specific performance.(2022) Su 02 Min Zhong No. 7352 Case,Trial by the Intermediate People's Court of Foshan City, Guangdong Province(2022) Yue 06 Min Zhong No. 4650 Case, the court has forced the return of votes on the agreement of concerted action.hold a negative opinion.
Combined with the above judicial practice, the underlying facts of the case areThe important factors for the court to make different judgments and determine whether the subject company can force the return of votes shall be determined comprehensively according to the specific circumstances agreed by the parties and whether the subject company participates in the contracting. First, the right of compulsory return is derived from the contractual rights agreed upon by the parties, if the subject company does not participate in the contracting, and the agreement does not specify that the subject company enjoys the right of compulsory return, then the compulsory return will lack the basis of rights, the subject company will be difficult to cooperate with the compulsory return.
Second, the agreement on the right of compulsory return should not exceed the effect of the articles of association. The agreement on concerted action has been approved by a resolution of the shareholders’ meeting, and the company’s mandatory proxy voting rights have been incorporated into the articles of association, thereby enhancing its enforceability and effectiveness.
In order to maximize the effect of the performance of the concerted action agreement, it is recommended that the subject company participate in the signing of the concerted action agreement, in which the right to force the return of votes is expressly agreed upon, and that the subject company directly guarantees the exercise of the right to force the return of votes. The company may be designated as a party to the concerted action agreement, or the relevant provisions of the agreement may be incorporated into the company’s articles of association, thereby authorizing the company to proactively enforce the concerted action agreement and, in the event that any party violates the terms thereof, to compel the re-attribution of voting rights.
3.
Dissolution of Concerted Action Agreement
One of the key issues that need to be paid attention to in the implementation of the concerted action agreement is the lifting of the concerted action agreement. Concerted action agreements as agreements, Civil Code No.Article 562 1The consensual discharge of the provisions of the Civil Code, No.Article 562 2The right of contractual release under paragraph 1 of the Civil Code, as well as the right of release under the Civil Code.Article 563 1The statutory right of release under the paragraph has room for application.
What is controversial in practice is whether the agreement of concerted action applies to the right of arbitrary release. Some courts have argued that a concerted action agreement should constitute a contract of entrustment under the Civil Code. According to Article 933 of the Civil Code, either the principal or the agent in a contract of agency has the right to unilaterally terminate the agency contract, that is, the right of arbitrary termination.
The court in (2020) Yun 20501 Min Chu 1514 case, (2020) Yu 03 Min Zhong 5122The above view is adopted in cases such as the No.Some courts have held that a concerted action agreement is not an agreement based on the trust relationship of the entrustment contract, but rather a co-ordination business consideration that maintains consensus on the company's decision-making, operation, management and other matters in order to ensure that the company's decision-making can be made and passed smoothly, and is a nameless contract.
At(2019)In the case of Ji 0791 Minchu No. 1620,The court held that the signing of the Agreement on Concerned Action and Share Repurchase by both parties was not a legal relationship of the entrustment contract. In the absence of a unanimous action agreement as a contract of entrustment, there is no question of arbitrary termination, and without prejudice to the interests of the State, the collective or third parties, the agreement"In addition to the two parties to negotiate the termination, either party may not unilaterally terminate this agreement" should be regarded as the embodiment of the autonomy of the parties.
According to the first sentence of Article 922 of the Civil Code,The trustee shall handle the entrusted affairs in accordance with the instructions of the principal.AndIn commercial practice, the content of concerted action agreement is mainly to agree that all signatories reach an agreement on specific matters, and in the absence of an agreement, to determine the opinions of all signatories according to a specific scheme,Concerused persons in concerted action agreementsThere is no need to act on the instructions of other persons acting in concert.
For this purpose, such concerted action agreementsIt may be different from the general entrustment contract, which is an atypical contract. If the parties to a concerted action agreement are to be granted the right to terminate it at will, such provision must be expressly stipulated by the legislature through legislation or by the Supreme People’s Court through judicial interpretation.
It is proposed to set a clause to confirm that the obligor of concerted action has no right to unilaterally terminate the agreement without the consent of the right holder of concerted action. The agreement on concerted action shall clearly stipulate that the parties exercising and obligated to perform concerted actions do not have a legal relationship of agency or entrustment.，To avoid the uncertainty of judicial practice and bring risks to the implementation of the agreement of concerted action.
Author Introduction
Lou Mengqian
Lawyer at Zhiheng (Shanghai) Law Firm
Major/Specialization:
Corporate Governance, Investment and Financing and M & A, Civil and Commercial Dispute Resolution
Email:
loumengxi@zhihenglawyer.com
Past Recommendations
Constant Longhua, Hope and Jun Tong-Know Henglong Chinese Only Introduce Plan!
Office Guide | Know Henglong Hua Law Firm, Open a New Chapter of Excellence in Practice
This article and its contents are shared by Zhiheng Attorneys at Law for informational purposes only and do not constitute legal opinions, advice, or a basis for decision-making by the law firm or its attorneys. If you require legal advice or a professional legal analysis, please contact the specialized attorneys at
, or leave your contact information via private message on our WeChat official account. If you wish to reprint this article, please contact the official account editor via the backend.
Zhiheng · Introduction